Healthcare Has Fallen Down and Can't Get Up: Get Your Own Spend Cube!

In today’s environment, hospitals continue to outsource their sourcing capabilities to a national or regional group of Group Purchasing Organizations (GPO’s), who claim to obtain leveraged savings for groups of large commodities.  To truly become more strategic, however, healthcare providers need to adopt a strategic intent to insist on visibility and cleanliness of all data, not just what is easily accessible.  Further, the data needs to be captured into an analytical environment that allows the flexibility to drill deeply into different types of data sets to unearth opportunities through benchmarking, analysis of non-traditional spending areas, and engagement of key stakeholders to review the results of these analyses.  Data is the only true enabler for change in the healthcare supply chain.

My position is that to get out of the muck, hospitals need to start to take control of their data, and not outsource it to others to manage for them.  My research points to the fact that healthcare is well behind most industries when it comes to the maturity of their procurement and spend management activities.  Most organizations in other industries have already proceeded through an evolution of basic processes in supply management. Instead of relying on third parties and trying to force clinicians to comply with their list of items on contracts, hospitals must first begin by establishing a charter to do so with their executive team, and make a commitment to moving away from a transaction-price-based focus.

In the second level of maturity, supply chain managers begin to engage clinicians in sourcing decisions, particularly high value and clinically sensitive items.  These teams are directed to make decisions on defining value relative to needs, analysis of spending patterns, measurements of supplier performance, and establishing a baseline set of data to analyze trends.  However, the most important component of success at this stage is physician and clinical engagement in decision-making that explicitly considers patient outcomes and total cost, not just year-over-year product price reductions.  In later stages, organizations can move to material and service visibility throughout the supply chain, management of total cost a system-wide basis, engagement of suppliers into hospital operations, integration of new technology deployment that drive down total cost and improve patient outcomes.

Based on our interviews and analyses of healthcare providers, we observed that many systems are still “stuck” in the first stage of supply chain maturity.  Many do not even have a charter for change established with the C-suite. As noted earlier, many hospital administrators are frustrated by their inability to engage with physicians in supply chain decisions.  A typical scenario for decisions often centers around the major gaps that exist between the four major stakeholders in healthcare, which includes Hospital Operations, Physicians, Supply Chain Management, and Suppliers.

On the other hand, industries such as automotive, electronics, oil and gas, industrial manufacturing, and others are well into the third or fourth stages of maturity.  To get there, they have all relied on using a detailed spend analysis to identify opportunities for improvement.  This begins and ends with having a good “spend cube” of data.

A spend cube is essentially a database that organizes transactional data into groups, according to:

1. Categories of like items (e.g. information technology, surgical and medical supplies, capital expenses, pharmaceutical purchases, etc.)
2. The suppliers the company spent money with on these categories (e.g. Pfizer (pharmaceutical), Cardinal Health (medical surgical supplies), or Lawson (information technology).
3. The user groups who spent funds in the past year with these suppliers (e.g. the specific facility, the operating room, administrative services, etc.)

In this way, the database consisting of these three areas forms the three side of the spend “cube” that characterizes the data.  A spend cube is constantly being updated as new transactions with suppliers occur, and is either periodically updated, or in more modern applications, updated in real-time or on a weekly basis in batch mode.

A spend cube can help a hospital understand how much each facility and the system as a whole is spending on external products and services TODAY, and how much the organization is projected to spend NEXT YEAR and in the future. On a regular basis, the supply chain management team must carefully examine spending patterns to identify any irregularities or trends, as well as identify areas where spending can be cut. This activity is known as spend analysis.

Spend analysis is the process of collecting historical data by commodity, relative to demand from the lines of business, with the exception of personnel expenses, occupancy, and corporate spend. The data should go into the appropriate level of unit-level detail required for analysis and category management, and should also be rolled up at an aggregate level on every element of what we spend. The resulting spend cube database provides a common understanding of historical spend relative to demand from each end user within an organization, based on accurate information collected through defined and automated procure-to-pay systems.

Just like any individual analyzes their budget and their spending habits from time to time, healthcare organizations use the spend cube database to conduct a spend analysis and process answer a wide variety of questions. For example, senior management might want to know:

• What categories of products or services make up the bulk of company spending? How do these figures compare to historical levels or to other firms in our industry?
• Are suppliers meeting our cost and performance criteria and are we getting enough value vs. the amount we are spending?   Are some categories of goods or services better served than others? Are some suppliers performing better than others?
• Are there opportunities to improve the firm’s purchasing performance?  For instance, can we use purchase consolidation to lower costs by pooling purchasing requirements across multiple areas?

Because the questions can vary so widely, there is no single “correct” approach to spend analysis.  The most important element however is to ensure that the data that goes into the spend analysis is correct, and does not contain errors.  Otherwise, as the old saying goes, “garbage in” results in “garbage out”, in the form of faulty information being provided in the spend cube.